MSA Safety Incorporated : Unaudited Pro Forma Condensed Consolidated Financial Statements - Form 8-K

Unaudited Pro Forma Condensed Consolidated Financial Statements

On January 5, 2023, MSA Worldwide, LLC ("MSA Worldwide"), a wholly-owned subsidiary of MSA Safety Incorporated (together with its consolidated subsidiaries, the "Company"), Mine Safety Appliances Company, LLC ("MSAC LLC"), a wholly-owned subsidiary of MSA Worldwide, and MSA Safety Jacksonville Manufacturing LLC ("MSA Jacksonville"), a wholly-owned subsidiary of MSA Worldwide, entered into a membership interest purchase agreement (the "Purchase Agreement") with Sag Main Holdings, LLC (the "Buyer"). The Buyer is a joint venture between R&Q Insurance Holdings Ltd. ("R&Q") and Obra Capital, Inc. ("Obra").

Pursuant to the terms of the Purchase Agreement, on January 5, 2023, MSA Worldwide transferred to Buyer all of the issued and outstanding limited liability company interests of MSAC LLC (the "Sale"). In connection with, and prior to the Sale, the Company's affiliates contributed approximately $204 million in cash to MSAC LLC and funded the redemption of approximately $111 million in existing intercompany notes due to MSAC LLC. Concurrently with the closing of the Sale, R&Q and Obra made aggregate capital contributions of $35 million to MSAC LLC. MSAC LLC also held approximately $26 million in existing cash and marketable securities at the time of the Sale.

Since MSAC LLC is the obligor for the Company's Specified Liabilities (as defined in the Purchase Agreement) and policyholder of related insurance assets, the rights and obligations arising under these items remained with MSAC LLC following the completion of the Sale. In addition, pursuant to and subject to the terms and conditions specified in the Purchase Agreement, the Buyer and MSAC LLC will indemnify MSA Worldwide, MSA Jacksonville, and their affiliates, including the Company, for all Specified Liabilities. Effective as of closing, MSAC LLC has been derecognized from the financial results of the Company.

The following unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2021, and nine months ended September 30, 2022, as well as the pro forma condensed consolidated balance sheet as of September 30, 2022, have been derived from the interim unaudited condensed consolidated financial statements included in our Quarterly Report on Form 10-Q for the period ended September 30, 2022, which was filed with the Securities and Exchange Commission on October 27, 2022, and from the audited consolidated financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 18, 2022. The unaudited pro forma condensed consolidated statements of income have been prepared as if the Sale occurred on January 1, 2021, while the unaudited pro forma condensed consolidated balance sheet has been prepared as if the Sale occurred on September 30, 2022. The unaudited pro forma condensed consolidated financial statements (the "Pro Forma Financial Statements") and the accompanying notes should be read together with the interim and annual financial statements referenced above.

The Pro Forma Financial Statements do not purport to represent what the Company's financial position and results of operations would have been had the Sale occurred on the dates indicated or to project financial performance for any future period or as of a future date. In addition, the Pro Forma Financial Statements are based on currently available information and certain assumptions that the Company believes are reasonable and are provided for illustrative and informational purposes only. The Pro Forma Financial Statements have been prepared to reflect adjustments to the Company's historical consolidated financial statements that are (1) directly attributable to the Sale; (2) factually supportable; and (3) with respect to the unaudited pro forma condensed consolidated statements of income, expected to have a continuing impact on the Company's results of operations. Assumptions underlying the pro forma adjustments are described in the accompanying notes and are based upon available information and assumptions that we believe are reasonable.

MSA SAFETY INCORPORATED

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

		Nine Months Ended September 30, 2022			Year Ended December 31, 2021
		As Reported			MSA LLC Divestiture			Notes			Pro Forma			As Reported			MSA LLC Divestiture			Notes			Pro Forma
Net sales		$	1,084,699					$	1,084,699			$	1,400,182					$	1,400,182
Cost of products sold			608,120						608,120				784,834						784,834
Gross Profit			476,579				-					476,579				615,348				-					615,348
Selling, general and administrative			247,378				(1,313	)			(a)				246,065				332,862				(1,207	)			(a)				331,655
Research and development			43,017						43,017				57,793						57,793
Restructuring charges			3,146						3,146				16,433						16,433
Currency exchange losses, net			4,788						4,788				216						216
Product liability expense			9,733				(9,733	)			(a)				-				185,264				(185,264	)			(a)				-
Operating income			168,517				11,046					179,563				22,780				186,471					209,251
Interest expense			14,158				21,268				(b)				35,426				10,758				30,049				(b)				40,807
Other income, net			(15,121	)			1,159				(c)				(13,962	)			(11,582	)			1,950				(c)				(9,632	)
Total other (income) expense, net			(963	)			22,427					21,464				(824	)			31,999					31,175
Income before income taxes			169,480				(11,381	)				158,099				23,604				154,472					178,076
Provision for income taxes			41,339				(2,845	)			(d)				38,494				1,816				38,618				(d)				40,434
Net income		$	128,141			$	(8,536	)			$	119,605			$	21,788			$	115,854				$	137,642
Net income attributable to noncontrolling interests		$	-			$	-				$	-			$	(448	)		$	-				$	(448	)
Net income attributable to MSA Safety Incorporated		$	128,141			$	(8,536	)			$	119,605			$	21,340			$	115,854				$	137,194
Earnings per share attributable to MSA Safety Incorporated common shareholders:
Basic		$	3.26					$	3.05			$	0.54					$	3.50
Diluted		$	3.25					$	3.03			$	0.54					$	3.48
Weighted average common shares - basic			39,243						39,243				39,173						39,173
Weighted average common shares - diluted			39,414						39,414				39,449						39,449

MSA SAFETY INCORPORATED

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands)

		September 30, 2022 As Reported			MSA LLC Divestiture			Notes			Other Adjustments			Notes		September 30, 2022 Pro Forma
Assets
Cash and cash equivalents		$	159,613			$	(316,266	)			(e)			$	315,000			(f)		$	158,347
Trade receivables, net			249,298								249,298
Inventories			349,664								349,664
Investments, short-term			24,930				(24,930	)			(e)						-
Prepaid income taxes			30,286								30,286
Notes receivable, insurance companies			5,901				(5,901	)			(g)						-
Prepaid expenses and other current assets			42,408				(10,560	)			(g)						31,848
Total current assets			862,100				(357,657	)				315,000					819,443
Property, plant and equipment, net			199,530								199,530
Operating lease assets, net			43,924								43,924
Prepaid pension cost			182,794								182,794
Deferred tax assets			32,039				(70,200	)			(g)				38,161			(j)			-
Goodwill			607,161								607,161
Intangible assets			281,461								281,461
Notes receivable insurance companies, noncurrent			38,428				(38,428	)			(g)						-
Insurance receivable and other noncurrent assets			139,852				(115,380	)			(g)						24,472
Total assets		$	2,387,289			$	(581,665	)			$	353,161				$	2,158,785
Liabilities
Notes payable and current portion of long-term debt		$	6,820					$	25,000			(f)		$	31,820
Accounts payable			104,972				7,216				(h)						112,188
Employees' compensation			47,499								47,499
Insurance and product liability			67,716				(35,296	)			(g)						32,420
Income taxes payable			22,555				-							22,555
Accrued restructuring and other current liabilities			99,576								99,576
Total current liabilities			349,138				(28,080	)				25,000					346,058
Long-term debt, net			597,844						290,000			(f)			887,844
Pensions and other employee benefits			173,654								173,654
Noncurrent operating lease liabilities			35,412								35,412
Deferred tax liabilities			30,409						38,161			(j)			68,570
Product liability and other noncurrent liabilities			358,417				(346,300	)			(g)						12,117
Total liabilities		$	1,544,874			$	(374,380	)			$	353,161				$	1,523,655
Equity
Preferred stock, 4.5% cumulative, $50 par value			3,569								3,569
Common stock, no par value			273,010								273,010
Treasury shares, at cost			(361,657	)							(361,657	)
Accumulated other comprehensive loss			(197,415	)							(197,415	)
Retained earnings			1,124,908				(207,285	)			(i)						917,623
Total shareholders' equity			842,415				(207,285	)				-					635,130
Total liabilities and shareholders' equity		$	2,387,289			$	(581,665	)			$	353,161				$	2,158,785

Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

(Millions of Dollars)

Note 1. Basis of Presentation

The pro forma condensed consolidated financial statements have been derived from the historical condensed consolidated financial statements of MSA Safety Inc. as adjusted to give effect to the sale of Mine Safety Appliances LLC (MSAC LLC). The pro forma condensed consolidated financial statements do not necessarily reflect what the Company's financial condition or results of operations would have been had the Sale occurred on the dates indicated. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

Note 2. Sale Transaction

Pursuant to the sale agreement, the Company's affiliates contributed approximately $341 million of cash and marketable securities to MSAC LLC and 100% of the equity interests of MSAC LLC were transferred to the Buyer. Following the completion of the transfer, the Company no longer has any obligation with respect to previously recorded Specified Liabilities (as such term is defined in the Purchase Agreement) or rights with respect to the related insurance assets. As such, effective as of closing, MSAC LLC has been derecognized from the financial results of the Company as we no longer maintain control of the entity.

The transaction was partially funded with a $250 million term loan at an interest rate of 4.81% and a drawdown on the revolving credit facility of $65 million at a weighted average interest rate of 4.81% ("Transaction Borrowings").

Note 3. Pro Forma Adjustments

The Unaudited Pro Forma Condensed Consolidated Financial Statements reflect the effect of the following pro forma adjustments:

(a)

Represents adjustments to eliminate the operating results of MSAC LLC, including

a.

Administrative expenses related to the management of Specified Liabilities

b.

Legal costs incurred in connection with insurance asset recovery matters

c.

Charges associated with adjustments to Specified Liabilities and related insurance assets

d.

Nonrecurring transaction costs associated with the Sale

(b)

Represents the incremental interest expense for the Transaction Borrowings. The interest rates on the Transaction Borrowings are variable in nature and the unaudited pro forma condensed consolidated statement of income reflect incremental interest expense based upon a current rate. A 0.125% increase or decrease in the weighted average interest rate on the Transaction Borrowings would increase or decrease interest expense by approximately $0.8 million for the year ended December 31, 2021 and $0.6 million for the nine months ended September 30, 2022.

(c)

Represents an adjustment to remove the interest income realized on the Notes receivable, insurance companies and Insurance receivables as well as the marketable securities from the periods presented.

(d)

Represents the estimated tax impact of the aggregate adjustments noted in items (a), (b), and (c) above.

(e)

Represents cash and marketable securities contributed to MSAC LLC by the Company totaling approximately $341 million.

(f)

Represents the proceeds from the Transaction Borrowings. The term loan portion of the Transaction Borrowings requires quarterly payments of approximately $6 million and accordingly, $25 million of the Transaction Borrowings is recognized as current liabilities.

(g)

Represents adjustments to reflect the disposition of Specified Liabilities and related insurance assets of MSAC LLC associated with the Sale as well as the write-off of the associated deferred tax asset.

(h)

Represents the recognition of a liability for direct, incremental transaction costs that have not yet been reflected in the historical financial statements.

(i)

Represents the recognition of the estimated loss related to the Sale. Amount is comprised of the following:

(in millions)
Specified Liabilities net of insurance assets		$	211.3
Cash and marketable securities contributed by the Company			(341.2	)
Transaction fees			(7.2	)
Write-off of deferred tax assets			(70.2	)
Estimated loss on sale		$	(207.3	)

The amount of loss could change materially as the Company finalizes its estimates to be reported in its Report on Form 10-K for the year ending December 31, 2022, and Report on Form 10-Q for the three month period ending March 31, 2023, each as applicable.

(j)

Represents a presentation adjustment to reclassify the resulting net deferred tax liability from noncurrent assets to noncurrent liabilities.